Oil Market Update

We have hardly looked at the oil sector for almost 2 months, and quite
frankly the reason for this was that the outlook for the sector was
simply too boring. However, the times they are a changin' and there is
growing evidence that a sizeable rally in the sector is brewing.

On the 1-year chart for Light Crude we can see that there have been
important positive developments over the past couple of months that
have created the potential for a strong rally. The sideways action
during this period has resulted in oil breaking out of the severe
downtrend that had shaved over 75% off the price of the world's most
important commodity - a truly incredible loss. In addition, just a
couple of weeks ago, oil appears to have broken out of the Symmetrical
Triangle potential base area that has formed from the late December
low. After dipping back into the triangle it broke out of it again a
couple of days ago so that its upside potential is steadily improving.
With the MACD indicator having returned to neutrality, downside
momentum has now completely abated. The continuing large gap between
the price and 50-day moving average which are almost coincident and the
200-day moving average are an indication of how oversold oil remains
despite the recent sideways movement, and also an indication of just
how much scope there is for a rally. If the market should suddenly "see
light at the end of the tunnel" with regard to the acute banking and
financial crisis, and the broad stockmarket rally strongly as a result,
then oil could easily spike upwards from here to the $70 or even the
$80 area very quickly, although it would probably drift back down
slowly afterwards before picking up again later, as these kinds of
moves always get overdone. Oil is therefore considered to be a strong
buy here, with a stop below the lower line of the triangle, as should
it break below this line it will signal that another downleg has
probably begun.

The 3-year chart for Light Crude puts the recent savage decline into
more perspective and enables it to be compared with the parabolic ramp
that preceded it.

The 3-year chart for the OIX oil index shows that oil stocks have
held up well compared to many sectors. One reason for this is that
until a few months ago oil companies had so much money that they didn't
know what to do with it following the bonanza years. This index has
been stuck in a large trading range from early October up until the
present bounded by about 450 and 650. Now it is clear that if it can
hold above the bottom of the range until the broad market rout has run
its course - which we may be close to - it will open up the prospect of
a substantial and tradable rally back up towards the top of the trading
range again, which would result in significant percentage gains.

It may seem odd to include a chart for copper in an Oil Market
update, but there are good reasons for doing so. Demand for both copper
and for oil is dependent on the health of the world economy, and this
explains the remarkable similarity between their charts over the past
several months. The copper price is known to serve as an "early warning
system" for the state of the world economy, and thus it will certainly
be of interest to oil traders to observe that copper yesterday broke
out to a 3-month high, and in so doing broke out from what appears to
be a bullish "Pan & Handle" base area. If this breakout is genuine
- and we will know soon enough - then this move by copper might be the
"first light at the end of the tunnel" signaling that some kind of
resolution of the global banking and financial crisis is close at hand.
This will probably involve full across-the-board nationalisation, which
would be the easiest way out that would allow the bill for the entire
mess to be pushed off onto the taxpayer.

Finally, the 3-year chart for the banking index shows that we are
rapidly approaching the acute phase of the banking and financial
crisis, as banking stocks continue to accelerate down their slippery
parabolic slope into a terminal vertical plunge that must result in
either bankruptcy or full nationalisation. Once the nettle is finally
grasped and what has to be done is done, there will probably be a huge
collective sigh of relief - and a massive relief rally across the
markets, which could be spectacular due to a tidal wave of panic short
covering. As we can see on the chart, we are probably only a month or
two away from this, maybe less. This would be expected to fuel a big
rally in copper and the oil sector.

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